Microsoft is twenty spots behind Apple; HP, Verizon, and AT&T are a bit ahead of it

Apple, Inc. (AAPL), the world's most profitable smartphone maker, may trample most corporations in market capitalization (total value of outstanding shares) and profits, but it is relatively far from the top of the latest Fortune 500 List for 2012, which ranks companies by adjusted revenue figures.

Apple's $108B+ USD revenue in 2011 was good enough to bump it from 35th to 17th. That's twenty spots ahead of Microsoft Corp. (MSFT) which managed to creep upwards one spot on $69.9B USD revenue fueled by windfall sales of Windows 7, the fastest selling operating system in history.

A record year propelled Apple upwards in the global corporate revenue rankings, but it remains behind a couple tech giants, according to Fortune. [Image Source: Double DT]

America's largest carrier Verizon Communications -- the joint venture between Verizon Communications Inc. (VZ) and Vodafone Group Plc. (LON:VOD) -- placed 15th, but second place rival AT&T, Inc. (T) came in four spots ahead in 11th, on merits of a more diverse, higher revenue portfolio.

Three of the top top four spots were occupied by oil companies with only Wal-Mart Stores, Inc. (WMT) breaking into the top ten. Wal-Mart was bumped from number one by Exxon Mobil Corp. (XOM), a company second only to Apple in market capitalization and profit.

This was the Fortune 500 List's 58th year. The list is a yearly feature in Fortune magazine, a publication of Time Warner, Inc. (TWX). Time Warner pulled no punches -- the former AOL owner's own rank this year fell from 95th to 103rd.

Samsung is not slouch, but its numbers are typical of a high performer in the hardware industry. Apple's numbers are startling high as a result of:1. Markups, propped up by clever marketing2. Massive carrier kickbacks.3. Tax evasion (see NYT piece)4. Cut throat labor negotiations (many Samsung phones are actually manufactured in South Korea, where labor is more expensive, but workers enjoy better conditions).

5. Most efficient supply chain in the hardware business6. Limited number of hardware models. Only one new iPhone per year compared to the dozens of devices other companies make. The result is much greater efficiency and almost zero inventory (unsold inventory is like spoiled milk in tech)7. Buys components in higher bulk farther out in advance than any hardware company on the planet, driving their wholesale prices far below everyone else's

Their operational advantages and efficiency combined with their stockpile of cash are primary reasons why Apple is so profitable. It is no surprise that Tim Cook is their CEO now.

Also, the "tax evasion" (which isn't illegal tax evasion, it is taking advantage of corporate loopholes) you speak of is par for the course. Microsoft, Motorola, Facebook, HP, Dell, Google, pretty much every single tech company out there engages in the same practices that Apple does. The main difference is that Apple currently makes higher gross revenue than anyone else, putting them in the media spotlight. Where Microsoft was (unfairly) in the 90s, now its Apple's turn.

I'm not a wealthy man, but I do own stock in various companies, including Microsoft. I'd never invest in Apple, because the bubble is going to burst. I know people have been saying that for awhile, but when you look at their business model, they are about as solid of a buy as Groupon; easily replicatable. They depend on so many companies (Google for primary applications, Foxconn for manufacturing, Samsung for components, etc) and the only thing they make in-house is design, easily copied, and improved upon.

Yes, they have a lot of sheep, but their products just are not that revolutionary, and in many ways, far behind the competition. The iPhone STILL doesn't have LTE/Wimax, 3.5" screen and on-screen keyboard isn't ideal, the iPad has no native printing support, jailbreaking is essential to get an 'open' experience from any IOS device, and so on.

People are slowly waking up to the concept of freedom which is why Android is doing so well.

I disagree, primarily because their business is so well run on top of them having such desirable and profitable products.

The interesting thing is that if we are looking at valuation based on price-to-earning multiple, Google is far more overvalued in comparison as it has a higher PE (and let's not even talk about the bubble Amazon is in). This is despite the fact that Apple continues to grow their profits at a significantly faster rate and pulls in much higher gross revenue.

Apple made more in one quarter than Google did all year and their growth continues to accelerate, yet it has a PE multiple more in line with IBM (which has been on a similar tear as AAPL) and Microsoft, both "mature" dividend paying stocks. AAPL's PE is actually near historical lows despite the stock price being at all-time highs. It is being valued like a mature stock, not a growth stock.

The fear you talk about has been depressing AAPL's price since 2009. It is already priced in. The only thing putting its price where it is are actual earnings.

If you missed the boat on AAPL, I don't know what to say.

quote: They depend on so many companies (Google for primary applications, Foxconn for manufacturing, Samsung for components, etc)

This means nothing, what do those companies gain by pulling away from Apple? Google makes more money from maps and search on iOS than they do on Android, about double the amount, despite the lower number of iOS devices out there. iOS traffic is so much higher than Android's that pulling maps and search from the iPhone would lose Google billions. Apple is also one of Foxconn's and Samsung's largest clients, both companies make billions off of them. The Foxxcon argument is particularly random given that nearly every other hardware company out there (HP, Dell, Intel, Microsoft, Nintendo, Sony, Amazon, etc etc) depends on them for manufacturing. What kind of point are you trying to make with them?

Your argument infers that the above companies would be better served if they stopped supplying to Apple. All these companies would do is lose money while other companies took them on. All that matters are the products.

quote: and the only thing they make in-house is design, easily copied, and improved upon.

The interesting thing is that nobody has yet improved upon their strong developer community, applications, marketplace, security, or centralized support. You're guaranteed OS updates on a 3 year old iPhone while ICS still makes up only about 1% of Android devices out there.

quote: The iPhone STILL doesn't have LTE/Wimax, 3.5" screen and on-screen keyboard isn't ideal, the iPad has no native printing support, jailbreaking is essential to get an 'open' experience from any IOS device, and so on.

Anandtech covered this last year. LTE will happen with the Qualcomm 28nm LTE chips coming out this year. If Apple put them in the iPhone last year it would have resulted in a severe drop in battery life compared to the prior model, unacceptable.

Screen size is a legit concern for some, and if you want a bigger one then there are plenty of other devices out there.

A good on-screen keyboard (ie - the one in iOS or WP7) is much better than physical for me, I'm never going back.

The "open" argument for Android makes little sense to me given that "open" is primarily in aid of service providers and hardware manufacturers. They are open to install crapware, custom UIs, and they are free to not support OS upgrades for hardware that is under a year old. On top of that developer support continues to be weak.

What good is an "open platform" if the best developers aren't even on it? If "open" mattered to me then I'd run Ubuntu instead of Windows, but no, I want a larger selection of applications. Simple.

quote: The "open" argument for Android makes little sense to me given that "open" is primarily in aid of service providers and hardware manufacturers.

Come on just say it: the "open" argument makes little sense to you because that's not how Apple does it. :)

For serious, though, "crapware and custom UI's" could just as easily happen on a closed source OS (see: almost every Windows PC for examples). In fact, those things could and would happen on any system where the carrier/OEM/etc. is allowed to install and run arbitrary code.

The open source nature of Android is most beneficial to those who would like to experiment or alter or create a cell phone operating system, but would otherwise not have access to do so. It's also beneficial to those who would like to do things that the carriers/OEM's would rather block access to. In other words, the direct benefits of the source code being accessible, mostly, are not for large OEM's or carriers, as they would have the capability to change or request changes to the OS regardless of closed vs. open.

Just to be clear: I do think "crapware" and some OEM skins on Android are a problem. It just has little or nothing to do with Android being open source. I also think there are obvious benefits for OEM's and carriers using Android, mostly related to getting a modern cell phone OS for free.

quote: Just to be clear: I do think "crapware" and some OEM skins on Android are a problem. It just has little or nothing to do with Android being open source. I also think there are obvious benefits for OEM's and carriers using Android, mostly related to getting a modern cell phone OS for free.

It has everything to do with Android being open for carriers to tinker with. That and decentralized/non-curated app markets are huge problems for Android.

I believe Google would have a much stronger platform if they had greater control over it. Ex-GM from Microsoft Charlie Kindel made an interesting post regarding Google slowly divesting itself of Android and releasing an OS that they have more control over. I think it would be good for them.

You don't seem to have a good grasp of the term "open source" and what it entails in this case. Open source and being able to run arbitrary binary programs are two completely different things. You seem to be deciding they're the same and vaguely calling them both "open". I've seen very little evidence of carriers "tinkering" with the source code, and they really have no reason to as they can run everything they want to run without doing that.

What's being abused by the carriers in almost all cases is the ability to run any program they choose, and this could happen with open or closed source operating systems. Go back to my Windows example. You wouldn't call Windows "open source", would you? And yet: lots of pre-installed crapware.

The part about Google divesting itself from Android... I could see that happening in the way Charlie Kindel describes. I don't feel like it's a sure thing, but it's an interesting possibility.

I am talking about the OS being open for other parties to tinker with in this case, yes. It is a huge negative for Android IMHO, especially given that so many solutions for issues I see are to either run vanilla Nexus devices or to root the device yourself. Carriers and hardware vendors are one factor that gets in the way of a better experience.

- Not easily replicated. Apple has a hundred billion (with a B) that it uses to buy up supplies years ahead of time. Not only does this ensure that it has stable supply at a stable cost, but also ensures that nobody else gets access, either. Why sell 15% of your supply to HTC and hope Moto buys another 10% and Nokia buys another 5% when you can sell 80% to Apple and be sure your factories are humming for the next 18 months? Even if those other companies had the cash to buy up a supplier's inventory, they lack the sales to flush it out the other end. This also means that Apple is able to sell products at lower cost if it so wants to - witness the iPad 2 or the iPhone 4, further eroding the ability of competitors to make too much money.

- Technology for technology's sake isn't what fuel's Apple's sales. To 90% of the population, LTE, WiMAX, 4G, OLED etc are all just a bunch of letters and numbers. Gingerbread, Honeycomb, Ice Cream Sandwich are all desserts. Tegra, OMAP, Exynos, Adreno, Snapdragon, Mali are all just gibberish. When half the people on this site say "my phone is great after i root it and put custom ROM on," well, then you've turned most of the population. Most people just want to use their devices - and Apple's historically provided that, with only a few hiccups along the way. Compare that with Android, where even their most ardent supporters always say "oh, that'll be fixed next time."

- Brand. This ties back to (generally) providing out of the box solutions, decent customer experience (overall), and yes, a good image. Most of Apple's competitors act as OEMs to AT&T and Verizon, meaning most customers have only the vaguest idea what kind of phone they use. Aside from us, not many people say "I have a Samsung Galaxy S2 running ICS" - more like "I have a T-Mobile Android phone." Compare that to iPhone users. "I have an iPhone." Instantly recognizeable, and added to a good customer experience, people will ask for one by name next time it comes to upgrade. If you have a generic Android (that you got for cheap or free), you'll only notice the name if the experience is truly awful - I only know that my friend has a Droid Incredible because he has truly atrocious battery life (I have no idea what he does to it)

Reasons Apple won't be on top forever:

- Brand. Nintendo fell from grace, Gap fell from grace, Xerox and IBM are shadows of their former selves in photocopying and personal computing. It will eventually happen to Apple, unless they're one of the rare brands (like Starbucks) that can keep chugging away for a couple of decades.

- Growth. Apple's stock price is fueled by incredible growth in revenues and profit. But even if its brand stays on top (like Starbucks), its growth will eventually begin to suffer and taper off (like Starbucks). That much is practically inevitable - heck, even today, Apple's already making as many iPhones as people make babies, they can't grow 50% year over year forever.

- Market disruptors. Apple's been the market disruptor for the past 10-15 years. Ripples with the first iMac, then a splash with the iPod, then the tidal wave today with the iPhone, iPad, and MBA/Ultrabooks. But if Apple gets it wrong and ties up too much money in one thing, that could cripple it and give it a lessor ability to respond (either by R&D or acquisition) when someone else comes along and shakes things up. Toshiba after HD-DVD, Sony after... well, how many failures do we need to count?

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I don't know when these things will happen, but I'm pretty sure they will at some point. I've invested in Apple, and I sold at a profit. That said, watching it shoot up is one heck of a ride.

This is pretty interesting reading everyone's analysis of Apple. Despite not liking their business ethics, I actually think Apple is in pretty good shape. Yes they're a bubble, but not one that's going to burst. IMHO it's going to slowly deflate out over a couple decades like Sony.

Early Sony/Apple - great design, solid products built in-house, marketing which accidentally was masterful. They kinda became successful without really expecting it.

Mid Sony/Apple (this is where Apple is now) - good design, production outsourced to reduce cost, masterful marketing. Basically selling the same product as everyone else, with a few innovative tweaks thrown in, and coasting off the reputation it built up with its early successes.

Late Sony/Apple - average design, people have caught on that production is farmed out, name-brand cachet has lost its luster. At this point it's indistinguishable from any other brand.

Success comes from a healthy mix of engineering and marketing. The pattern I've seen in the tech industry is that boards (who are usually MBAs) tend to overemphasize marketing and view engineering R&D as an expense. So you get a company which stumbled upon the right healthy mix and became successful. Then the board asks themselves "how can we improve this?" And the answer is almost always outsourcing production (because it costs less) and cutting R&D (because it costs too much). What you have left is a marketing company selling rebranded stuff, living off of its brand name. The original innovation is mostly gone. Sony, HP, AT&T/Lucent, and to a lesser degree IBM all went through this in my lifetime.

I see Apple going the same route. Woz (engineer) and Jobs (marketer) hit that perfect blend of engineering and marketing. Maybe "persuasion" is a better word than marketing - some of the early stories of Jobs encouraging engineers in the development of the original Mac are awe-inspiring. When Jobs returned, without someone of Woz's stature to keep him balanced, the company started a hard turn towards the marketing side. Apple's R&D as a % of revenue is about the lowest there is in the tech industry. Like Sony, they're fast becoming a marketing company selling other companies' products by slapping their brand name label onto it.

Unless they revive their in-house R&D and production, that name recognition is only going to carry them so far before people figure out that they can buy pretty much the same product elsewhere for a lower price. e.g. The Macbooks are designed and manufactured by Quanta, who also designs and makes most of the HP and some of the Dell laptops. Those HPs and Dells which are "copying" the Macbooks? They're not actually copies, they just look alike because they were designed and manufactured by the same (Taiwanese) people.

Apple's strength as I see it is that they're willing to buck the industry trend. They built themselves up as a contrarian company ("think different"). This has led them to be first in certain markets (thin tablets), but also to some flops which nobody else bothered to attempt (Newton). In laptops in particular, they're one of few who insist on a high quality screen. That will serve to help distinguish them from the pack, slowing their fall into mediocrity, and insuring they always have a strong core user/fan base (as with the Mac product line).

Apple still does a lot of design in-house - the CNC machined and lasered enclosures for MacBooks are something that nobody else has access to at the moment, and to say iPads and iMacs are farmed out in terms of design work sounds kind of absurd.

That said, you can see a bit of what you're talking about in some of their low-end stuff. Take the last plastic MacBook, for example. It was reasonably pretty and a reasonable computer, but change the white enclosure to a textured grey and you could pretty much pop a Dell logo in place of the Apple and you'd have a nice Inspiron instead.

I will agree on the R&D - smart R&D and acquisitions are the best long term use of the cash hoarde that Apple has, not dividends. The best thing to do when you're ahead of the game is to stay ahead of the game.

Insourcing production though doesn't seem like the right idea. The kind of massive scale in terms of human labor that all of these companies need is something the US won't be able to do without making these devices cost much more than they already do.

As to your last point - I can forsee a day where Apple's no longer at the top of the game, but I don't think I'll ever see the day where Apple won't try to be luxury - nicely designed enclosures, upper-end components (almost the entire line is i7 based right now), and nice interfaces (screens, keyboards, touchpads) will likely be Apple's hallmark.

I take it you haven't seen the HTC One series of machined polycarb with laser drilled speaker holes. This isn't super high technology. Car manufacturers have done this for decades. If you want really high tech mass production look to CMOS manufacturing. Those factories cost billions to build.

It isn't. Apple/HP/Dell aside, the poster child for this is IBM spinning off their laptop division to Lenovo. The result has been a resurgence in the company, just look at how their profits exploded since they refocused their business.

quote: Apple's R&D as a % of revenue is about the lowest there is in the tech industry. Like Sony, they're fast becoming a marketing company selling other companies' products by slapping their brand name label onto it.

Unless they revive their in-house R&D and production, that name recognition is only going to carry them so far before people figure out that they can buy pretty much the same product elsewhere for a lower price. e.g. The Macbooks are designed and manufactured by Quanta, who also designs and makes most of the HP and some of the Dell laptops. Those HPs and Dells which are "copying" the Macbooks? They're not actually copies, they just look alike because they were designed and manufactured by the same (Taiwanese) people.

Completely incorrect. Apple does their own R&D, board design, SoC design (the A4/A5/A5X are in-house, believe it or not), and chassis machining in-house, after which they contract physical production out to their specs. When it came to the transition to machined aluminum, Apple actually spent hundreds of millions of dollars themselves on the equipment to make their aluminum chassis with.

Apple's percentage R&D is low compared to other companies simply because they don't make that many products. They only spend on what they decide to focus on, and their focus is extremely tight. When Jobs came back to Apple he reduced the Mac product line from dozens of models to only four (pro/consumer laptop/desktop), and he axed things like printers. If Apple releases a phone, it is only one model per year. If they release a tablet, it is one model per year. Laptop and desktop designs last them for years, the only difference being the CPU/GPU inside.

Compare this with other tech companies that not only release dozens of smartphones, they also make TVs, set-top players, washers and dryers, you name it. Any PC manufacturer has dozens of product lines while Apple only has a few, and they are differentiated primarily on display size and thickness.

In any case, to say that the companies that they contract physical production to is actually responsible for Apple's product designs is totally wrong.